Buffettology

by David Clark, Mary Buffett

Overview

In the world of investing, the name Warren Buffett is synonymous with success and prosperity. Learn how Warren Buffett did it—and how you can too.

Building from the ground up, Buffett chose wisely and picked his stocks with care, in turn amassing the huge fortune for which he is now famous. Mary Buffett, former daughter-in-law of this legendary financial genius and a successful businesswoman in her own right, has teamed up with noted Buffettologist David Clark to create Buffettology, a one-of-a-kind investment guide that explains the winning strategies of the master.

* Learn how to approach investing the way Buffett does, based on the authors' firsthand knowledge of the secrets that have made Buffett the world's second wealthiest man
* Use Buffett's proven method of investing in stocks that will continue to grow over time
* Master the straightforward mathematical equipments that assist Buffett in making investments
* Examine the kinds of companies that capture Buffett's interest, and learn how you can use this information to make your own investment choices of the future

Complete with profiles of fifty-four "Buffett companies" -- companies in which Buffett has invested and which the authors believe he continues to follow -- Buffettology can show any investor, from beginner to savvy pro, how to create a profitable portfolio.

Product Details

ISBN-13:	9780684867786
Publisher:	Scribner
Publication date:	03/19/1999
Sold by:	SIMON & SCHUSTER
Format:	eBook
Pages:	320
Sales rank:	237,182
File size:	2 MB

About the Author

For over twenty years, David Clark has been considered the world’s leading authority on the subject of Warren Buffett’s investment methods. His international bestselling investment books, co-authored with Mary Buffett—Buffettology, The Buffettology Workbook, The New Buffettology, The Tao of Warren Buffett, Warren Buffett and the Interpretation of Financial Statements, The Management Secrets of Warren Buffett, Warren Buffett and The Art of Stock Arbitrage, and The Warren Buffett Stock Portfolio—have been translated into more than twenty foreign languages and are considered “investment classics” the world over. He holds a B.S. degree in finance and a law degree from the University of California, Hastings College of the Law. He is presently writing Berkshire Hathaway: Fortress of Capital, a corporate biography. When not consumed with matters of finance, he is engaged in the second great passion of his life, which is trial law and maintains an active national practice.    
For over twenty years, Mary Buffett has been considered a leading authority on the subject of Warren Buffett’s investment methods. Her international bestselling investment books, co-authored with David Clark—Buffettology, The Buffettology Workbook, The New Buffettology, The Tao of Warren Buffett, Warren Buffett and the Interpretation of Financial Statements, The Management Secrets of Warren Buffett, Warren Buffett and The Art of Stock Arbitrage, and The Warren Buffett Stock Portfolio—have been translated into twenty-four foreign languages and are considered “investment classics” the world over. Ms. Buffett is an international speaker, entrepreneur, political and environmental activist, and has appeared on television as one of the top finance experts worldwide. She has been the principal speaker for prestigious organizations around the world. Ms. Buffett has worked in a wide range of businesses including extensive work as a consultant to several Fortune 500 companies. She is an associate of the top ranked UK Buffettology Fund in the United Kingdom. In 2013 she became a contributing blogger to the Huffington Post. The blogs and information about the UK Buffettology Fund are on her website MaryBuffett.com.

Read an Excerpt

From Chapter 2

How to Use This Book

Folly and discipline are the key elements of Warren Buffett's philosophy of investing -- other people's follies and Warren's discipline. Warren commits capital to investment only when it makes sense from a business perspective. It is business perspective investing that gives him the discipline to exploit the stock market's folly. Business perspective investing is the theme of this book.

This discipline of investing from a business perspective has made Warren the second richest business person in the world. Currently Warren's net worth is in excess of $20 billion. Warren is the only billionaire who has made it to the Forbes list of the four hundred richest Americans solely by investing in the stock market. Over the last thirty-two years his investment portfolio has produced an average annual compounding rate of return of 23.8%.

As humans we are susceptible to the herd mentality, and so we often fall victim to the emotional vicissitudes that propel the stock market and feed enormous profits to those who are disciplined, like Warren. When the Dow Jones Industrial Average has just dropped 508 points and all the sheep are jumping ship, it is investing from a business perspective that gives Warren the confidence to step into that pit of fear and greed we call the stock market and start buying. When the stock market soars to the stratosphere, it is the discipline of investing from a business perspective that keeps Warren from foolishly allocating capital to business ventures that have neither hope nor prospects of giving him a decent return on his investment.

This book is about the discipline of investing only from a business perspective. Together we will explore the origin and evolution of this philosophy. We will delve into the early writings of Warren's mentor Benjamin Graham and the ideas of other financial luminaries of this century, and travel to the present to explore the substance of Warren's philosophy.

Warren made his fortune investing in the securities of many different types of businesses. His preference is to acquire 100% ownership of an enterprise that has excellent business economics and management. When he is unable to do that, his next choice is to make a long-term minority investment in the common stock of a company that also has excellent business economics and management. What confuses people who are trying to decipher his philosophy is that he also makes investments in long-, medium-, and short-term income securities. And he is a big player in the field of arbitrage.

The characteristics of the businesses that he is investing in will vary according to the nature of his investment. A company that he is willing to invest in for arbitrage purposes may not be the kind of business in which he wants to make a long-term investment. But regardless of the type of business or the nature of the investment, Warren always uses the basics of business perspective investing as the foundation for his decision.

Most people have the intellectual capacity to understand Warren's philosophy of investing from a business perspective, but few have the dedication and willingness to work to learn the tools of his craft. The purpose of this book is to lay out, step by step, the foundation of Warren's philosophy and the manner in which he applies it. This book is a tool to facilitate the task of learning, and it is our intention to teach you Warren's philosophy so that you may acquire the skills to practice this discipline yourself.

Before we start, I would like to introduce a few concepts and terms that will be used throughout the book and give you an idea of where we will be heading as we voyage through the seas of high finance.

First of all, let's take the term "intrinsic value." Its definition has been debated for the last hundred years. It fits into our scheme because Warren will buy into a business only when it is selling at a price that makes business sense given the business's intrinsic value.

Determining a business's intrinsic value is a key to deciphering Warren's investment philosophy. To Warren the intrinsic value of an investment is the projected annual compounding rate of return the investment will produce.

It is this projected annual compounding rate of return that Warren uses to determine if the investment makes business sense. What Warren is doing is projecting a future value for the business, say, ten years out; then he compares the price he is going to pay for the business against the business's future, projected value, and the length of time required for the business to reach that projected value. By using an equation that we will show you later in the book, Warren is able to project the annual compounding rate of return that the investment will produce. The annual compounding rate of return the investment is projected to produce is the value he uses to determine if the investment makes business sense when compared to other investments.

In its simplest manifestation it works like this: If Warren can buy a share of stock in X Corporation for $10 and can project that in ten years the share will be worth $50, he can then calculate that his projected annual compounding rate of return will be approximately 17.46% for the ten-year period. It is this projected annual compounding return of 17.46% that he will then compare to other investments to determine whether the investment in X Corporation makes business sense.

You may be wondering: If Warren's intrinsic value model requires a projection of a business's future value, then how does he go about determining that future value?

That, my friends, is the crux of solving the enigma of Warren's investment philosophy. Just how does one determine the future earnings of a business in order to project its future value and, thus, its intrinsic value? This problem and Warren's method of solving it will be the focus of much of this book.

In short, Warren focuses on the predictability of future earnings; and he believes that without some predictability of future earnings, any calculation of a future value is mere speculation, and speculation is an invitation to folly.

Warren will make long-term investments only in businesses whose future earnings are predictable to a high degree of certainty. The certainty of future earnings removes the element of risk from the equation and allows for a sound determination of a business's future value.

After we have learned what Warren believes are the characteristics of a business with predictable earnings, we will learn how to apply the mathematical calculations he uses for determining the business's intrinsic value and what the return on his investment will be. The nature of the business enterprise and whether it can be bought at a price that will yield a sufficient return will determine the investment's worth and whether or not we are investing from a business perspective.

Copyright © 1997 by Mary Buffett and David Clark

Table of Contents

Disclaimer

PART I: THE ART OF BASIC BUFFETTOLOGY

1. Before You Begin This Book

2. How to Use This Book

3. Roots

4. Investing from a Business Perspective

5. What Is Businesslike Investing?

6. Warren's View of Earnings

7. The Price You Pay Determines Your Rate of Return

8. The Corporation, Stocks, Bonds -- a Few Useful Explanations

9. Valuing a Business

10. The Only Two Things You Need to Know About Business Perspective Investing: What to Buy -- and at What Price

11. What We Can Learn from Warren's Secret Weapon: The Magic of Compounding

12. Determining What Kind of Business You Want to Own

13. The Theory of an Expanding Intrinsic Value

14. The Mediocre Business

15. How to Identify the Excellent Business -- the Key to Warren's Good Fortune

16. Nine Questions to Help You Determine If a Business Is Truly an Excellent One

17. Where to Look for Excellent Businesses

18. More Ways to Find a Company You Want to Invest In

19. What You Need to Know About the Management of the Company You May Invest In

20. When a Downturn in a Company Can Be an Investment Opportunity

21. How Market Mechanics Whipsaw Stock Prices to Create Buying Opportunities

22. Inflation

23. Inflation and the Consumer Monopoly

24. A Few Words on Taxation

25. The Effects of Inflation and Taxation on the Rate of Return, and the Necessity to Obtain a 15% Return on Your Investment

26. The Myth of Diversifications Versus the Concentrated Portfolio

27. When Should You Sell Your Investments?

28. Warren's Different Kinds of Investments

PART II: ADVANCED BUFFETTOLOGY

29. The Analyst's Role in Ascertaining Earning Power

30. The Mathematical Tools

31. Test #1, to Determine at a Glance the Predictability of Earnings

32. Test #2, to Determine Your Initial Rate of Return

33. Test #3, to Determine the Per Share Growth Rate

34. Determining the Value of a Company Relative to Government Bonds

35. Understanding Warren's Preference for Companies with High Rates of Return on Equity

36. Determining the Projected Annual Compounding Rate of Return, Part I

37. Determining the Projected Annual Compounding Rate of Return, Part II

38. The Equity/Bond with an Expanding Coupon

39. Using the Per Share Earnings Annual Growth Rate to Project a Stock's Future Value

40. How a Company Can Increase Its Shareholders' Fortunes by Buying Back the Company's Stock

41. How to Determine If Per Share Earnings Are Increasing Because of Share Repurchases

42. How to Measure Management's Ability to Utilize Retained Earnings

43. Short-Term Arbitrage Commitments

44. Bringing It All Together: The Case Studies:

Gannett Corporation, 1994

Federal Home Loan Mortgage Corporation, 1992

McDonald's Corporation, 1996

How Warren Got Started: The Investment Vehicle

46. Fifty-four Companies to Look At

47. Waiting for the Perfect Pitch Epilogue

Index

What People are Saying About This

Stevin Hoover

Absolutely the best book ever written on Warren Buffett's investment methods.
— Hoover Capital Management

Editorial Reviews

A probe inside the head of a financial genius.

Business Week

A sound and well proven investment policy.

Fort Worth Star Telegram

For decades, Warren Buffet has been a nearly heroic figure of finance, whose strategy turned an initial $105,000 investment into a $16-billion fortune and whose publicly traded holding company, Berkshire-Hathaway, rose from a $450-per-share price in the 1980s to $36,000 in 1997. Here, Buffet's former daughter-in-law, a CEO of Superior Assembly, with a 30-year friend of the family, who is an Omaha portfolio analyst and lawyer, tells all. Buffet scorns speculative stock-market hype. He buysat a carefully researched favorable pricea 100% or partial interest in companies having "intrinsic value" and a logical pattern of growth as a virtual consumer monopoly based on need (e.g., GE) or common acceptance (e.g., Coca-Cola) financed tax-free by undistributed earnings. Guidance is given here on researching a company's intrinsic value and management competence, making stock-price downturns into buying opportunities, taking account of inflation taxation considerations, and the tantalizing question of when to sell. Most interesting is the authors' closing rundown of "Warren's" specific holdings and how they grew.

Publishers Weekly - Publisher's Weekly